Your credit score is critical when considering life's big and small purchases, affecting everything from your ability to get a new credit card to your suitability for home ownership. Given that your credit history is so influential, it's important that you request your own credit reports and understand what they mean. Keeping tabs on your credit score annually lets you know where you stand financially and can help you protect yourself against fraud.
Know What Affects Your Score
According to the college financial planning website, Adventures in Education, your credit report reflects your bill-paying practices -- that is whether you pay on time -- what kind of accounts you have, how many accounts you have and your debt levels. Credit reports also show public record information, such as if you've ever filed for bankruptcy, been criminally charged or had bills go past due. In general, people with, high debt levels, many creditors and poor payment histories have lower credit scores. Those who pay on time, carry little debt and have long-standing bank accounts have shinier credit ratings.
Check With All Three Agencies
There are three credit reporting agencies in the United States: Experian, TransUnion and Equifax. You can get a free report from each of the three agencies once every year, according to the Federal Trade Commission. Make sure that you review all three reports. On Bankrate.com, Howard Dvorkin, president of Consolidated Credit Counseling Services, says that looking at just one of these three reports is useless. Since the three agencies could receive different information about you, you should look at the report provided by each. Adventures in Education reiterates this advice, noting that your cell phone company, your credit card provider and your bank could all report to a different credit bureau.
Credit Report Basics
Your report should contain your name, social security number, date of birth, addresses and the name of your current employer. You should also see public record information, a report of the different accounts you have, including opening and closing dates, balances and limits. Your report also includes a record of who's looked at your credit history, as well as consumer statements. Consumer statements explain why certain entries appear in your credit history. For example, perhaps you refused to pay for a product that wasn't what you ordered. Even if this shows up as a negative entry on your credit report, a consumer statement offers a way to explain what happened to people accessing your history. To add a consumer statement, or to correct information on your credit reports, contact each of the issuing agencies.
Understanding Your Number
According to financial institution Sallie Mae, credit scores fall anywhere from 300 to 850, and a high score is what you want to see on your reports. Your credit rating is also called your FICO score, in reference to the Fair Isaac Corporation that invented the system. Sallie Mae reports that 35 percent of your score is determined by your payment history. Your total balances and available credit dictate 30 percent of your score. If you're using almost all of the credit available to you, lenders see you as higher risk. The length of your credit history controls 15 percent of your score. Sallie Mae says, an account must be open for nine to 12 months to prove sound borrowing and payment behavior. The number and type of accounts you have make up 10 percent of your score. Having too many sources of credit marks you as high risk, but having a variety of different account types proves that you understand responsible credit use. Finally, 10 percent of your score is determined by new credit applications. Many applications in a one-year period sets off alarm bells for lenders, especially if a history of late payments makes it look like you're using credit to steer clear of bankruptcy.
Hard and Soft Inquiries
Inquiries into your credit history are labeled "hard" and "soft," according to Sallie Mae. Hard inquires are made by prospective lenders when you apply for credit -- remember that too many hard inquiries, that is, loan applications, within a short time frame can hurt your credit score. Soft inquiries are ones that you make when checking your credit score, or when credit card companies briefly review your information to send you pre-approved card applications. The number of soft inquiries doesn't affect your credit, since soft checks aren't associated with you making new applications for more credit.
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